There are two broad classes of systems:
CHAPTER ONE: THE INFORMATION SYSTEM
Information is a business resource. Like the other business resources of raw materials,
capital, and labor, information is vital to the survival of the contemporary business
organization. Every business day, vast quantities of information flow to decision makers
and other users to meet a variety of internal needs. In addition, information flows out
from the organization to external users, such as customers, suppliers, and stakeholders
who have an interest in the firm.
INFORMATION OBJECTIVES
Specific information objectives will differ from firm to firm as specific user needs vary.
Three fundamental objectives are, however, common to all organizations:
1. To support the firm’s day-to-day operations
2. To support management decision making
3. To support stewardship function of management
AN INFORMATION SYSTEMS FRAMEWORK
The information system is the set of formal procedures by which data are collected,
processed into information, and distributed to users.
The information system accepts input, called transactions, which are converted through
various processes into output information that goes to users.
A transaction is an event that affects or is of interest to the organization and is processed
by its information system as a unit of work.
This definition encompasses both financial and nonfinancial events.
A financial transaction is an economic event that affects the assets and equities of the
organization, is reflected in its accounts, and is measured in monetary terms.
A GENERAL MODEL FOR AIS
Nonfinancial transactions are events that do not meet the narrow definition of a
The elements of the general model are:
financial transaction.
Financial transactions and nonfinancial transactions are closely related and are often
processed by the same physical system.
1. Accounting information system
AIS subsystems process financial transactions and nonfinancial transactions that
directly affect the processing of financial transactions. The AIS is composed of
three major subsystems:
1.1 The transaction processing system (TPS), which supports daily business
operations with numerous reports, documents, and messages for users
throughout the organization. The TPS consists of three transaction cycles:
the revenue cycle, the expenditure cycle, and the conversion cycle. Each
cycle captures and processes different types of financial transactions;
1.2 The general ledger/financial reporting system (GL/FRS), which produces
the traditional financial statements, such as the income statement, balance
sheet, statement of cash flows, tax returns, and other reports required by
law;
1.3 The management reporting system (MRS), which provides internal
management with special-purpose financial reports and information
needed for decision making such as budgets, variance reports, and
responsibility reports.
2. Management information system
Management often requires information that goes beyond the capability of AIS.
As organizations grow in size and complexity, specialized functional areas
emerge, requiring additional information for production planning and control,
sales forecasting, inventory warehouse planning, market research, and so on. The
management information system (MIS) processes nonfinancial transactions that
are not normally processed by traditional AIS.
1. End users fall into two general groups: external and internal. External users
include creditors, stockholders, potential investors, regulatory agencies, tax
authorities, suppliers, and customers. Internal users include management at
every level of the organization, as well as operations personnel.
 • DATA ATTRIBUTE. The data attribute is the most elemental piece of
potentially useful data in the database.
• RECORD. A record is a complete set of attributes for a single occurrence
within an entity class.
• FILES. A file is a complete set of records of an identical class.

Database management involves three fundamental tasks: storage, retrieval,

and deletion. The storage task assigns keys to new records and stores them in
their proper location in the database. Retrieval is the task of locating and
extracting an existing record from the database for processing. After processing
is complete, the storage task restores the updated record to its place in the
database. Deletion is the task of permanently removing obsolete or redundant
records from the database.
6. Information generation is the process of compiling, arranging, formatting, and
presenting information to users. Regardless of physical form, useful information
has the following characteristics: relevance, timeliness, accuracy,
2. Data sources are financial transactions that enter the information system from
completeness, and summarization.
both internal and external sources.

• RELEVANCE. The contents of a report or document must serve a

Data VS Information
purpose.
Data are facts, which may or may not be processed (edited, summarized, or
• TIMELINESS. The age of information is a critical factor in determining
refined) and have no direct effect on the user. By contrast, information causes
its usefulness. Information must be no older than the time of the action
the user to take an action that he or she otherwise could not, or would not, have
it supports.
taken. Information is often defined simply as processed data.
• ACCURACY. Information must be free from material errors.
• COMPLETENESS. No piece of information essential to a decision or task
3. Data collection is the first operational stage in the information system. The
should be missing.
objective is to ensure that event data entering the system are valid, complete,
• SUMMARIZATION. Information should be aggregated in accordance
and free from material errors. In many respects, this is the most important stage
with the user’s needs.
in the system. Should transaction errors pass through data collection
undetected, the system may process the errors and generate erroneous and
7. Feedback is a form of output that is sent back to the system as a source of data.
unreliable output. This, in turn, could lead to incorrect actions and poor decisions
by the users.
4. Data processing
5. Database management. The organization’s database is its physical repository
for financial and nonfinancial data. The levels in the data hierarchy—attribute,
record, and file.
ORGANIZATIONAL STRUCTURE AND AIS
Functional Segmentation. Segmentation by business function is the most common
method of organizing a business entity.
Materials Management. The objective of materials management is to plan and control
the materials inventory of the company. A manufacturing firm must have sufficient
inventories on hand to meet its production needs and yet avoid excessive inventory levels.
• Purchasing is responsible for ordering inventory from vendors when inventory
levels fall to their reorder points.
• Receiving is the task of accepting the inventory previously ordered by
purchasing.
• Stores takes physical custody of the inventory received and releases these
resources into the production process as needed.
Production. Production activities occur in the conversion cycle in which raw materials,
labor, and plant assets are used to create finished products. The specific activities are
determined by the nature of the products being manufactured. In general, they fall into
two broad classes:
1. Primary manufacturing activities. Primary manufacturing activities shape and
assemble raw materials into finished products.
2. Production support activities. Production support activities ensure that
primary manufacturing activities operate efficiently and effectively. These
include, but are not limited to, the following types of activities:
• Production planning involves scheduling the flow of materials, labor,
and machinery to efficiently meet production needs.
• Quality control monitors the manufacturing process at various points
to ensure that the finished products meet the firm’s quality standards.
• Maintenance keeps the firm’s machinery and other manufacturing
facilities in running order.
Marketing. The marketplace needs to know about, and have access to, a firm’s products.
The marketing function deals with the strategic problems of product promotion,
advertising, and market research.
Distribution. Distribution is the activity of getting the product to the customer after the
sale.
Personnel. Competent and reliable employees are a valuable resource to a business. The
objective of the personnel function is to effectively manage this resource.
Finance. The finance function manages the financial resources of the firm through
banking and treasury activities, portfolio management, credit evaluation, cash
disbursements, and cash receipts.
THE ACCOUNTING FUNCTION
The accounting function manages the financial information resource of the firm. In this
regard, it plays two important roles in transaction processing.
1. Accounting captures and records the financial effects of the firm’s transactions.
2. The accounting function distributes transaction information to operations
personnel to coordinate many of their key tasks.
The Value of Information. The value of information to a user is determined by its
reliability. For this to happen, information must possess certain attributes—relevance,
accuracy, completeness, summarization, and timeliness.
Accounting Independence. Information reliability rests heavily on the concept of
accounting independence. Simply stated, accounting activities must be separate and
independent of the functional areas that maintain custody of physical resources.
THE INFORMATION TECHNOLOGY FUNCTION
The IT function is associated with the information resource. The information technology
function has four key functions:
1. Data processing. The data processing group manages the computer resources
used to perform the day-to-day processing of transactions.
• Centralized Data Processing. Under the centralized data processing
model, all data processing is performed by one or more large
computers housed at a central site that serve users throughout the
organization.
• Distributed Data Processing. An alternative to the centralized model
is the concept of distributed data processing (DDP). DDP involves
reorganizing the IT function into small information processing units
(IPUs) that are distributed to end users and placed under their control.
IPUs may be distributed according to business function, geographic
location, or both.
2. Systems development and maintenance. The information needs of users are
met by two related functions: systems development and systems maintenance.
The systems development function is the process by which organization
acquire information systems. The systems maintenance function is responsible
for making changes to existing systems to accommodate change in user needs.
3. Database administration. Centrally organized companies maintain their data
resources in a central location that is shared by all end users. In this shared data
arrangement, a special independent group—database administration—headed
by the database administrator is responsible for the security and integrity of the
database.
4. Network administration. A network is a collection of interconnected computers
and communication devices that allows users to communicate, access data and
applications, and share information and resources. Network administration is
responsible for the effective functioning of the software and hardware that
constitute the organization’s network.
THE ROLE OF THE ACCOUNTANT assurance services group or be independent. The IT auditor attests to the
effectiveness of a client’s IT controls to establish their degree of compliance with
Accountants As System Designers
prescribed standards.
Traditionally, accountants have been responsible for key aspects of the information
Internal Auditing. Internal auditing is an appraisal function housed within the
system, including assessing the information needs of users, defining the content and
organization. Internal auditors perform a wide range of activities on behalf of the
format of output reports, specifying sources of data, selecting the appropriate accounting
organization, including conducting financial statement audits, examining an operation’s
rules, and determining the controls necessary to preserve the integrity and efficiency of
compliance with organizational policies, reviewing the organization’s compliance with
the information system. Today, we recognize that the responsibility for systems design is
legal obligations, evaluating operational efficiency, detecting and pursuing fraud within
divided between accountants and IT professionals as follows:
the firm, and conducting IT audits.
• The accounting function is responsible for the conceptual system
• The IT function is responsible for the physical system.

The design of the conceptual system involves specifying the criteria for identifying
delinquent customers and the information that needs to be reported. The accountant
determines the nature of the information required, its sources, its destination, and the
accounting rules that need to be applied.

The physical system is the medium and method for capturing and presenting the
information. The computer professionals determine the most economical and effective
technology for accomplishing the task. Hence, systems design should be a collaborative
effort. Because of the uniqueness of each system and the susceptibility of systems to
serious error and even fraud, the accountant’s involvement in systems design should be
pervasive.

Accountants As System Auditors

Auditing is a form of independent attestation performed by an expert—the auditor—who

expresses an opinion about the fairness of a company’s financial statements. Public
confidence in the reliability of internally produced financial statements rests directly on
their being validated by an independent expert auditor. This service is often referred to
as the attest function.

External Auditing

• Assurance. Assurance services are professional services, including the attest

function, that are designed to improve the quality of information, both financial
and nonfinancial, used by decision makers.
• IT Auditing. IT auditing is usually performed as part of a broader financial audit.
The organizational unit responsible for conducting IT audits may fall under the